For tax years beginning after December 31, 2024, under the new Internal Revenue Code (IRC) Section 174A, businesses can once again deduct domestic research and experimental (R&E) expenditures in the year they are incurred. This change, part of the 2025 tax reform signed into law on July 4, 2025, as P.L. 119-21 (Republicans’ “One Big Beautiful Bill Act”), reverses the capitalization requirement for domestic R&E introduced under the Tax Cuts and Jobs Act (TCJA), restoring a more favorable approach for companies investing in innovation.
What Currently Qualifies as R&E?
R&E expenditures include costs incurred in the development or improvement of a product, process, formula, invention or software. Section 174 defines R&E expenditures broadly. Qualifying costs, which are directly related to R&E activities, may include:
- Wages
- Supplies
- Contract Research
- Overhead (Related to R&D)
- Software Development
- Certain Indirect Costs
- Research Funded by a Customer or Third Party
What Section 174 Rules Are Changing?
Under the TCJA, all taxpayers (for tax years beginning after December 31, 2021) were required to capitalize R&E expenditures and amortize them over either five years (for domestic research) or 15 years (for foreign research). Now, with the enactment of new legislation, taxpayers:
- Have the option to deduct domestic R&E expenditures in the year incurred, starting in 2025; and
- Are still required to capitalize foreign R&E costs and amortize them over 15 years.
What About Prior Years?
The legislation includes a retroactive provision that allows businesses to accelerate unamortized domestic R&E costs from tax years 2022 through 2024 in the first tax year beginning after December 31, 2024. Taxpayers also have the option to spread the deductions evenly over the 2025 and 2026 tax years.
For eligible small businesses (those with $31 million or less in average annual gross receipts in the prior three tax years), there is also the opportunity to amend prior returns to claim full deductions in the 2022 – 2024 tax years. If the business claimed a research tax credit during these same years, the operation of IRC Section 280C would reduce those deductions by the amount of the full gross credit (thereby reducing the net benefit of those credits in the 2021 – 2024 tax years by 21%.
How Can Businesses Plan for the Section 174 Update?
The return to immediate deductibility affects more than just timing. Businesses should consider how the change may impact:
- Estimated tax payments and cash flow in 2025
- Coordination with Section 280C and past R&D credit claims
- Whether the business was sold
- Whether the taxpayer had the funds to pay the tax associated with the “addback” of the 2022 – 2024 capitalization
- Overall tax strategy, particularly for entities with complex income mixes or multi-state operations
- Individual impact for shareholders of flow-through entities
Strategic planning can help businesses determine whether to amend past returns, accelerate deductions into 2025 and 2026, or both. A summary of considerations is below:
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Strategy |
Pros |
Cons |
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Do Not Amend:
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Amend:
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Next Steps
An analysis should be performed to determine whether amending a return for a refund (with a reduced credit) is more beneficial than taking the deduction in tax years 2025 or spread over tax years 2025 and 2026.
A downloadable brochure at the top and bottom of this page outlines these small business provisions and implementation support in more detail.
How Can Cherry Bekaert Help
Cherry Bekaert’s R&D Tax Credits team can help you prepare for the return to immediate expensing and evaluate your options for retroactive deductions. We will work with you to identify qualifying Section 174 costs, assess the impact on prior-year returns, coordinate with Section 280C, and plan for estimated tax payments and financial reporting. Whether you are amending past filings or updating accounting methods, our team can guide you through each step.
Download our R&D Amortization Services brochure or contact us to get started.
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